What exactly is a culture of Innovation?

1 March 2017

What exactly is a culture of Innovation?

The expression “culture of innovation”  is a perennial part of most innovation strategies. But why is it so important?  And what exactly does it mean?

Why is it important?

Mark Pagel in his book “Wired for Culture”  says that for many people one of the most distinctive features of life in human societies is the sense of belonging to a particular cultural group.  He makes a strong case that culture exercises a form of mind control over us.  We willingly accept this mind control – probably without knowing it – in return for the protection and prosperity our cultures provide. Just think of a hockey game or rock concert.

Culture has had a profound effect on the history of innovation.  Joel Mokyr – a historian – in his book “The Culture of Growth” shows how the culture of Europeans changed radically from 1500 to 1700.  In 1500 the culture was very intolerant one where dissent) was harshly criticized, and punished (think the Spanish Inquisition); by 1700 scientific investigation and new scientific theories were everywhere (think Newton) and widely accepted and the stage was set for the Industrial Revolution a few decades later.  If the culture hadn’t changed the Industrial Revolution couldn’t have happened and our world would be vastly different today.

Mokyr shows that the idea of progress is a central aspect of culture, and in particular how each generation sees itself compared with their ancestors – whether we are better or worse than they were.  For almost two thousand years the accepted wisdom in Europe was that the ancient Greek philosophers  (in particular Aristotle) had created a perfect understanding of the world, and that to better understand the world one only had to study the ancient texts.  That is the attitude that gradually eroded from 1500 to 1700.  One key development that caused this change was the voyages of discovery (e.g. Columbus, in 1492) which discovered things the ancients knew nothing about and discredited their claims to universal knowledge.

So clearly, culture is a critical factor to consider in innovation strategy.  If the culture isn’t right, new ideas are stifled.  However, society has limits to what it will accept, often driven by cultural values.  For example, GMOs, which are often opposed despite being proven safe.  So there are culturally imposed limits to what innovations we are prepared to accept, and this is an important aspect of innovation policy.

What does it mean?

Robert Boyd and   Peter Richerson (profs at the University of California) developed this widely accepted definition of culture:  “ Culture is a set of beliefs, values and preferences, capable of affecting behaviour, that are socially (not genetically) transmitted and that are shared by some subset of society.”  This implies that there is not just one culture in Canada, but a multitude of different cultures.  And they all have different attitudes towards innovation.  Just think of differences between provinces, between different age groups and between different companies.

Culture is constantly changing and evolving, although many aspects of culture change very slowly.  Just think how our attitudes towards things like smoking and using seat belts have changed in the last couple of decades. There are also vast differences between countries as well.  In the World Values Survey Canada has strong self-expression values similar to Australia, New Zealand, Britain and Iceland, very different from countries such as Russia and Belarus.

Conclusion

So what exactly is a culture of innovation?  It’s complicated.  It is obviously a vitally important factor that deserves serious attention in any innovation policy.  The writers of innovation strategies probably have in mind a general acceptance of progress and openness to new ideas, a willingness to collaborate and perhaps a willingness to try new things, and to take initiatives.  But if they mean that, it would be better to say that, rather than obscure it with a very loaded term like “culture of innovation.”

 

Peter Josty
403-249-0191
p.josty@thecis.ca


How will Canada grow in the next 50 years?

15 February 2017

How will Canada grow in the next 50 years?   

Winston Churchill is reputed to have said “The farther back you can look, the farther forward you are likely to see.”  Let’s test that idea by looking at innovation and economic growth.
Robert Gordon, an economist at Northwestern University wrote “The Rise and Fall of American Growth”, which looked at economic growth and innovation over the last  couple of hundred years and included the diagram below for changes in productivity:

From Gordon’s point of view, you can think of the past 150 years unfolding as a series of industrial revolutions.  The first one – based on waterpower, the steam engine and its offshoots – the railways, steamships, and the shift to iron and steel – resulted from inventions made in the period from 1770 to 1820.  This was a big enough revolution to drive economic growth through most of the nineteenth century.

The second industrial revolution resulted from inventions in electricity and the internal combustion engine in the late nineteenth century. This included automobiles, highway construction, and television, and electrification of factories, among many others.  This drove economic growth to around 1970.  The third industrial revolution was associated with information and communications technology and started in the 1960s. This had a profound effect but in a much narrower part of the economy.  That explains the drop off in productivity after 1970.

Through all of this change, however, real gross domestic product (GDP) per capita in Canada just continued growing at a steady 2% a year, on average.  This works out to a doubling every 35 years.  The graph below from the World Bank shows this from 1961.

So what might the future hold?

If you look at the fundamentals, we have a number of radical technologies at an early stage of development.  Examples are robotics, artificial intelligence, and genetic engineering.  These would appear well positioned to drive growth in the next few decades. Offsetting this, however, we have an aging population, but increasing longevity and increasing education.

If you ask the experts, there are several recent reports:

  • PricewaterhouseCoopers, in “The World in 2050” projects that Canada will grow its real (inflation adjusted) GDP per capita at roughly 1.6% annually, on average, to 2050.
  • The OECD in an outlook to 2060 projects that Canada’s GDP per capita between 2011 and 2060 will grow at 1.6% on average (at US PPP).
  • The Conference Board of Canada says that over the long term, potential output will be limited to annual growth below 2 per cent as the aging of the population puts downward pressure on labour force growth.

If you ask me?  I would place a hefty bet that for the next few decades will be in the 1½ – 2% ballpark on average.  Despite what the gloomsayers think, that’s not bad.  It means a doubling of wealth every 35 years or so.  So a doubling every generation, just like the last 50 years.

Peter Josty
403-249-0191
p.josty@thecis.ca


Where are Alberta’s mid-sized companies?

21 November 2016

Where are Alberta’s mid-sized companies?

Alberta is home to a thriving start up sector.  According to the Global Entrepreneurship Monitor report, it has more start up activity than almost anywhere else does in the developed world, with around 15% of the adult population involved in entrepreneurial startup activity.

Alberta is also home to a significant number of head offices.  A  2014 study shows that of the 234 corporate headquarters of companies listed on the S&P/TSX Composite Index that are based in Canada, 82 or 35% are located in Ontario, 79 or 33.9% are in Alberta, followed by Quebec and British Columbia.

However, Alberta is underrepresented in medium sized firms, according to a recent Business Development Bank report.  In Canada, medium sized businesses (100-499 employees according to Statistics Canada’s definition) contribute only 12% to Gross Domestic Product.  This compares with over 50% in Germany and about one third in the US. So there is plenty of room to grow the medium sized sector in Alberta.

Why is this?
On the face of it, you would expect that the dynamic startup activity should lead to a large number of medium sized companies.  We don’t really know why this doesn’t happen.  However, there are a number of hypotheses:

  • The preferred exit mode for high growth startups is to be acquired by a large company rather than growing in Alberta.
  • The need for capital leads to public share ownership which makes an Alberta company vulnerable to a hostile takeover, and leaves the entrepreneur having a sense of losing control of his or her business.
  • Lack of courage. Deloitte found in a recent study that most Canadian businesses lack courage. They found that only 11 percent of the companies they surveyed could be considered truly courageous.  [ http://tinyurl.com/jbwgvyd]
  • Many startups don’t want to grow and are happy to remain small.
  • Many small firms lack the managerial and marketing skills and expertise to grow.

Why does this matter?
If you look around the world at other thriving jurisdictions, a large population of mid-sized companies is often a sign of economic stability and an engine of economic growth.  In Germany, for example, the Mittelstand – the thousands of mid-sized, usually family owned manufacturing firms –are universally seen as a major economic benefit.  These companies typically are internationally competitive in niche markets using advanced technology, and have revenue in the $50 million -$100 million and up range. The Economist provides a snapshot of the Mittelstand at http://tinyurl.com/kqu2zoz  In his book “Hidden Champions of the 21st Century” Herman Simon says they “innovate constantly in narrow markets, grow through aggressive pursuit of international sales, work closely with customers, design their own machines and processes, and hoard institutional knowledge by hiring people when they’re wet behind the ears and keeping them until they’re graying at the temples.”

What do we know about mid-sized companies in Canada?
A recent Business Development Bank report provides some insights for Canada (http://tinyurl.com/gmm36ac):

  • Almost no small businesses grow to become medium sized business. Only 0.1% of small firms cross the 100-employee threshold each year.
  • Very few medium sized companies become large companies. Only 2% cross the 500-employee threshold each year.
  • Medium sized firms have 78% of the productivity of large firms, and are ahead of small firms.
  • Quite a few medium sized firms shrink to become small firms. Nearly 13% of medium sized firms drop below the 100-employee threshold each year to become small firms.
  • Medium sized firms represent less than 1% of all firms in Canada, and that percentage has shrunk since 2001.

Can we create a Mittelstand in Alberta?
The Mittelstand evolved based on unique German history of laws, labour relations and many other factors that can’t be replicated anywhere else.  Trying to transplant a successful ecosystem model from one place to another is a recipe for failure, as the many attempts to replicate Silicon Valley have shown.  However, creating more mid-sized companies in Alberta is realistic and achievable.  An Alberta “Mittelstand” would likely look very different from the German Mittelstand, possibly with more service companies, and with a focus on the existing industries in Alberta such as energy, agriculture, forestry, health and IT.

A neglected category?
It appears that medium sized firms are a neglected category.  Almost all reports talk about SMEs, and as small firms are the vast majority (over 99%) of these firms they get virtually all the attention.  A huge amount of effort goes to encouraging startups, and recently attention has moved to how to scale up, but the characteristics of medium sized firms are poorly understood.  We do not know what their major challenges are, or what incentives may encourage them to grow more.  Judging from the German experience, medium sized firms behave very differently to small firms.

What would the benefits of an Alberta Mittelstand?
If we could build a strong cohort of mid-sized companies in Alberta it would bring numerous benefits.  For example:

  • Economic stability, as these firms would be less likely to lay off staff in downturns, as they would be insulated from the quarterly to quarter treadmill of public companies.
  • High paying jobs, as they need highly skilled personnel to target niche markets.
  • Investment opportunities for Albertans. Albertans would have the opportunity to invest in the mid-sized firms and share in their growth.
  • Increased exports, as the mid-sized firms punch above their weight in exporting.
  • Economic diversification, as mid-sized firms would target export markets not served by current companies in Alberta.
  • More R&D spending. Larger companies tend to spend more than very small companies, so growing the number of mid-sized companies would increase business R&D in Alberta.

Conclusion.
Alberta has relatively few mid-sized companies.  Having more would create significant benefits.  It is a startling fact that almost no small firms grow to be mid-sized firms, and that the proportion of medium sized firms has declined since 2001.  We currently have very limited knowledge of the particular challenges and opportunities facing medium sized firms, or how they form in the first place. They appear to be a neglected business sector.  Paying more attention to medium sized firms would likely pay large dividends.

Peter Josty
403-249-0191
p.josty@thecis.ca


Unicorns? Be careful what you wish for…

26 January 2017

Unicorns?  Be careful what you wish for…

Shopify is a Canadian success story.  Founded in 2004 in Ottawa, it provides e-commerce solutions for small and medium sized companies, based on software used in the founders snowboard business.  It’s initial public offering in 2015 valued the company at $1.27 billion, making it a rare “unicorn” in Canada (a start up with valuation of $1 billion).  As of January 2017, it had 325,000 customers in around 150 countries and had sold over $24 billion worth of merchandise.

What’s not to like about Shopify?  Nothing.  It’s a great Canadian success story.  Could we build an industrial growth strategy by aiming to build more unicorns?  That seems to be implicit is some of the talk about supporting startups in Canada.  Not likely.  Consider the following:

  • There are only a tiny number of unicorns. Up to 2015 there had only been a total of either two or five Canadian “unicorns”, depending on who you talk to. That is out of 78,000 startups  across Canada each year.
  • They employs very few people. At the end of 2015 Shopify reported it had 1,048 employees. That compares to a Canadian workforce of about 19 million, according to Statistics Canada.
  • Their business is very risky. Remember Novatel, Nortel Networks, Microsystems International Limited, and Rim? The likelihood of Shopify still being in business  in 10 years is quite low, judged by this history.  Shopify is compelled to write in its annual report “Investing in our shares involves a high degree of risk.”
  • It is vulnerable to foreign takeover. According to a survey by PwC, nearly two-thirds of emerging companies are planning to be acquired in the next three years. Some will be acquired by foreign companies and moved out of Canada.
  • Some companies move out of Canada voluntarily. For instance Slack, once a Canadian unicorn, moved from Vancouver to San Francisco. Another example is Uber.  The co-founder of Uber (a University of Calgary alumnus, Garrett Camp)  started an earlier company (StumbleUpon) in Calgary, but moved to San Francisco to better obtain funding.  That’s where he started Uber.
  • Only a tiny fraction of small companies even become medium sized companies. According to a report by the Business Development bank, only 0.1% of small businesses become medium sized businesses in any given year.

So, should we celebrate Shopify?  Absolutely!  Should we try and use it as a model for an economic growth strategy?  Absolutely not.

Peter Josty
403-249-0191
p.josty@thecis.ca


What’s new in cybersecurity?

THECIS is pleased to have Dr. Tom Keenan, a leading expert on cybersecurity as our next speaker.  His topic is “What’s new in cybersecurity?”

Come and join us for breakfast and Dr. Keenan’s presentation followed by an opportunity to ask questions.

Time: 7:00 – 9:00 am

Date: Thursday, February 7th, 2017

Place: Innovate Calgary, 3553 – 31 street NW, Calgary Room 2/3

For full details and to register: